Cryptocurrency

With BTC-Backed Loan, Goldman Sachs Signals TradFi’s Designs on DeFi’s Bread and Butter – PYMNTS.com


Banking and investment giant Goldman Sachs has issued its first cash loan secured by cryptocurrency, signaling the entry of a traditional financial institution into a field that has generally been the purview of decentralized finance, or DeFi.

Goldman’s loan was backed by bitcoin, and while the details were not revealed, the firm told CoinDesk that the “interesting piece for us was the structure and the 24-7-365 day risk management.”

The loan differs from DeFi lending in several notable ways. For one thing, Goldman gave the borrower fiat currency rather than dollar-pegged stablecoins used by DeFi lending protocols like Maker, Aave and Compound, which offer stablecoin loans backed by 125% to 150% crypto collateral locked into smart contracts.

See also: PYMNTS DeFi Series: What Is DeFi?

For another, the whole purpose of cryptocurrencies from Bitcoin on was to eliminate the middlemen from financial transactions — the opposite of borrowing money from Goldman Sachs bank.

And it’s not the first sign that firms in the traditional finance, or TradFi, space are getting over their wariness of crypto.

Goldman Sachs just announced plans to ramp up its crypto trading business and banks like JPMorgan and Citibank are offering some clients crypto investment products. Blackrock this year has revealed plans to offer crypto trading services and just this week launched an exchange-traded fund focused on blockchain- and crypto-focused firms like Coinbase.

And on April 28, investment giant Apollo Global Management announced it had hired a top crypto executive away from J.P. Morgan Chase to create a new digital asset arm.

Read also: Apollo Taps JPMorgan Vet Christine Moy in Digital Asset Project

TradFi Follows the Money

That said, traditional finance has been getting more and more interested in DeFi, both because the technology can cut expenses and because there’s money to be made. There is currently about $75 billion locked in various DeFi projects, according to DeFi Pulse. That’s up from $9.7 billion two years ago

And while that’s down from the $100 billion in total value locked, or TVL in November, it’s a number that, along with crypto’s $1.7 trillion market cap, is just too much for TradFi firms to ignore.

Along with investing in the automated market maker (AMM) liquidity pools that power decentralized exchanges (DEXs), crypto lending is DeFi’s bread and butter. But while the DeFi loans can technically be used for anything, the vast majority are cycled right back into other DeFi investments — yield farming and liquidity mining.

See also: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?

DeFi borrowing can be risky because even with heavy over-collateralization, crypto volatility causes margin calls on a regular basis.

TradFi vs CeFi vs DeFi

Goldman isn’t the only traditional finance company offering bitcoin collateralized loans — Fidelity Digital Assets began offering cash loans for crypto collateral at the end of 2020 and has been working with crypto-focused Silvergate Bank and a number of the crypto lending FinTechs like Nexo, Celsuis and BlockFi known as centralized finance, or CeFi, in the industry.

But, CeFi was hit hard by the Securities and Exchange Commission in February, when BlockFi agreed to a $100 million fine when the agency said its interest-bearing lending accounts violated securities law. That was after the SEC threatened Nasdaq-listed crypto exchange Coinbase into halting plans for Coinbase Lend, leading to a widespread belief that many other CeFi lenders are negotiating deals.

Read more: SEC’s New Top Cop: No Free Pass For Unregistered Crypto Lenders

Still, a number of those CeFi firms are in the mortgage lending space, meaning they are offering loans for more traditional purposes — and in traditional dollars — than most DeFi lenders.

Crypto-friendly Signature Bank last week announced during its earnings call that it intends to compete with Silvergate Bank by offering crypto-backed loans.

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